Thursday, August 18, 2011

The economic downturn has resulted in massive foreclosures, layoffs, and spiraling credit card debt. Is filing for Chapter 7 bankruptcy the way to save your home and property and get out of debt? I am a bankruptcy attorney in Arizona and represent clients filing Chapter 7 and Chapter 13 personal bankruptcies. Here is what you really need to know.

The decision to file bankruptcy is not one that can be made lightly. There are many things that must be taken into consideration first. Do you really need an attorney? How will it affect your credit and your ability to buy things in the future? How much of your property will you be allowed to keep? Do you even qualify to file? There were significant changes made to the federal bankruptcy law in 2005 which made fewer people eligible to file for Chapter 7, instead they must now file Chapter 13. What is the difference between a Chapter 7 and a Chapter 13 bankruptcy filing?
Filing for bankruptcy can eliminate most of your debt, stop a foreclosure on your home, garnishment of your paycheck, and judgments against you. You can even get back recently garnished paychecks. Once you file bankruptcy, an "automatic stay" is put in place protecting your property for the duration of the procedure.

After you file for bankruptcy, your credit score will actually increase within a year. This is due to the elimination of all the bad debts, replaced with only a bankruptcy on your record. You will start receiving new credit card offers within a few weeks afterwards, and can even qualify to buy a new home through the FHA. Bankruptcies show up on credit reports up to 10 years after filing.
A Chapter 7 bankruptcy completely discharges all of your eligible debt. Unsecured debt like credit card debt and most medical bills will be forgiven. Certain kinds of debts like tax debt less than three years old, child support and alimony, and student loans generally do not qualify for discharge. Secured debt like a house and car do not qualify for discharge, but the bankruptcy laws provide for an exemption so you can reaffirm those debts and keep your house and car.
A Chapter 13 bankruptcy restructures your debt. While you cannot fully discharge most of your debt like you can in a Chapter 7, you can get the amounts owed reduced to a manageable level. This is a good option if your income is too high and you do not qualify for a Chapter 7, such as if you have some valuable property that is not exempt that you want to keep, or you have a second unaffordable mortgage on your home that you need reduced. You must be receiving regular income in order to file for Chapter 13. Unlike a Chapter 7, which discharges your debts immediately and it is over, a Chapter 13 can take up to 5 years to process, as you are paying down your debts. It costs more, but the majority of the cost is rolled into the payments over those next few years.
In order to file Chapter 7, your income cannot be higher than the median income for your state. In Arizona, that is $41,915 for a family size of one, $54,510 for a family size of two, $56,696 for a family size of three, and $66,030 for a family size of four. There is sometimes a way to get around it, through a "means test " which lets you add in certain additional expenses to decrease your salary.
You are allowed to keep a certain amount of property, including your house (generally as long as the equity in it is under $150,000), your car (as long as the equity in it is under $5000) and various personal items such as household furnishings. Some things like investment accounts and extra boats/RVs are not exempt, however, and could be seized during the bankruptcy and distributed to creditors. You are only allowed one car per person filing.
Be careful about doing your own bankruptcy without an attorney. Approximately 50% of pro se bankruptcy filings get dismissed due to various mistakes. It costs several hundred dollars to get a dismissed bankruptcy reinstated. If your bankruptcy does make it through, you risk losing some of your property. Too many pro se filers end up losing their car, their investments, and other property because they did not understand the process.
For example, if you have made payments or transfers of property to a relative or close family friend recently that were not market value transactions, those payments may be seized and shared with other creditors. The federal bankruptcy law was revised in 2005 and is 500 pages long. If you hire a document preparation service instead of an attorney, they will not be able to give you legal advice. There are many complex issues that come up when filing bankruptcy. Even attorneys use bankruptcy software to assist them with the ins and outs.
Watch out for debt management companies. Many people end up with worse debt after using them, and still have to file bankruptcy.
The 2005 changes to the bankruptcy law include a provision allowing the court to seize your property if you owe back child support or alimony. There were also requirements added to take two short credit counseling classes.
I tell my clients not to feel guilty for considering bankruptcy. Our federal government has decided to bail out the financial industry instead of providing tax relief for us, including small businesses that create jobs. The credit card industry has consolidated within the last few years, leaving consumers hanging out to dry with exorbitant increases in interest rates and granting little wiggle room for negotiation. Virtually all of my clients file bankruptcy not because they are "spenders," but because they lost their job, their small business is struggling, they have sky high medical bills, or went through a brutal divorce or child custody fight. You would be surprised how many of your friends have filed bankruptcy. Fortunately, it is a relatively private proceeding and unless someone really knows where to look, no one will ever know you filed bankruptcy.
There are many more things you need to be aware of when deciding to file for bankruptcy. An attorney can go over all of them with you. Bankruptcy is a scary word but the reality is, it can put you in a much better place.

Alexander Bankruptcy Law Firm provides low cost Chapter 7 and 13 personal bankruptcies. Free consultation with a compassionate attorney who will handle your case personally. Call 24/7, available to meet with you around your schedule. Conveniently located in Central Phoenix along the Camelback corridor.